Essential Utilities Earnings: Capital Investments Driving Growth; Dividend Growth Record Extended

We reaffirm our $42 per share fair value estimate for Essential Utilities WTRG after the company reported earning $0.34 per share during the second quarter, up from $0.31 during the second quarter of 2022. Essential remains on track to meet our full-year outlook. We also reaffirm our narrow moat rating.

Growth at the water business, mostly flat operating costs, and favorable weather boosted second-quarter earnings and helped offset a $0.08 per share drop in first-quarter earnings due to exceptionally warm winter weather that reduced gas use. Essential’s gas utility represents about one-third of earnings on a full-year basis with most of those earnings in the first quarter.

First-half earnings were $1.07 per share, flat with the first half of 2022. We reaffirm our 2023 full-year EPS estimate at the low end of management’s $1.85-$1.90 guidance range, assuming no contribution from the long-delayed Delcora acquisition. Pushing back the Delcora deal into 2025 doesn’t have a material impact on our fair value estimate.

Essential continued its remarkable 32-year streak of greater than 5% annual dividend increases, announcing a 7% increase during the quarter to $1.23 per share annualized.

Essential’s growth profile continues to shift toward organic investment and away from water acquisitions. Essential has closed only $45 million worth of deals this year and has only $60 million of deals pending, excluding Delcora. This contrasts with the $1 billion of annual organic capital investment we forecast for the next several years. Customer rate increases tied to these capital investments drive almost all of our 6% annual earnings growth forecast. Management continues to target 5%-7% annual consolidated earnings growth with higher growth at its gas business.

Management’s plan to request a base rate adjustment later this year at Peoples Gas will be the first since Essential’s 2020 acquisition. A constructive decision next year will support earnings growth in 2025.